We are seeing a fast V-shaped recovery post demonetisation: IndusInd Bank

Posted on Friday, December 9th, 2016 | By Mr. Romesh Sobti

Most opinion peddled about demonetisation is wrong, says IndusInd Bank BSE 1.37 % chief executive Romesh Sobti. There may be short-term pain, but the benefits are more enduring, he tells ET’s MC Govardhana Rangan and Joel Rebello in an interview. Edited excerpts:

The hot topic in the country now is demonetisation on which the views are extreme.What do you think?

There are so many experts commenting on demonetisation, but our sense is that the pace at which the informal economy is converting into formal economy is surprising. The adaptability of people to switch to non-cash modes of living and creating livelihoods is very rapid. The trader has the option of shutting down or remodelling his business without tax evasion.People who are wailing the most are the ones whose businesses are predicated on tax evasion and that cannot be the viable proposition in the new scheme of things. Therefore, the remodelling of the informal economy is happening rapidly even in our businesses like microfinance and vehicle financing. After the initial few days when we saw some slowdown in disbursements and collections, we are seeing a pretty fast V shaped recovery and many of our partners also are saying the same thing. Microfinance recovery rates are now almost at normal levels in spite of the fact that the new notes many not be there.Disbursements of Aadhaar direct transfers have also been fast-forwarded. Overall, the adaptability of people and willingness to do without cash is also surprising us.

But there is a hit to the economy. How bad is it going to be?

I think you are shooting in the dark trying to estimate the impact on GDP. There are many Cassandras who say the GDP will crash. I question their ability to forecast. The sensing on the ground is that businesses are rapidly remodelling. There may be some impact on GDP, but it’s a gross exaggeration to say that we will lose many percentage points because we have no way to forecast it. Our people will adapt quickly to the new circumstances and discover that cash is not the only way of doing business. Paying taxes and, therefore, bringing a larger part of your informal business into formal businesses is the way to go. The pains we are seeing are the pains of remodelling businesses.

How long will the road to recovery be?

Recovery is happening much faster than people thought because the option is to lose livelihood or pay taxes and continue your business models. People will not choose to lose livelihood. To sympathise with those who evaded taxes is very difficult. If you do heavyweight exercises, your muscles pain, but that’s a sweet pain because you know your muscles are getting stronger. I think the economy is going to come out stronger. There may be loss of GDP, but the recovery is going to surprise everybody.

What has been the impact on your own business?

There are some businesses that had elements of cash. Poor rural woman who used to pay back in small denomination notes and business correspondents stopped collecting those notes. But it took very little time to recover. In the first few days, collections went down 30% to 40% but within 15 days, the recovery percentages went back to the 90s. In some places, we have 98% recovery already, so in that sense, we don’t feel the need to use the regulatory dispensation at all.

Some say that even though the intention was justifiable, the way it was handled could have been better…

That’s typical of our country. If you didn’t do anything, you will be perpetually blamed for not doing anything and if you do anything, (they say) you could have done better. But the point is that there had to be an element of surprise in this. You couldn’t announce it in advance. The surprise element also goes into many other parts like printing of notes. My own feeling is that the need for remonetisation in terms of currency supply is not going to be the same as the demonetised inventory because you are not going to need the cash. I think the total amount of cash needed in the system is going to shrink, so why should you print the same amount? Yes of course, you can say that the supply should have been uniform across the country, but the logistics in India are mind boggling and I have sympathy for those who are managing these logistics, including banks. Bankers have stood up to this cause as a national duty. That pain had to be there and I don’t think you can point fingers to say you could have done it better.

What about the benefits? Are they over stated?

There are many impacts. Take a small SME company. Banks always found it difficult to lend based on the balance sheet because there was not enough disclosure on the balance sheet, but we knew that there were other parts of the business that were not being disclosed and, therefore, surrogates were being used. Now you will bring that 40% or 50%, which was not being shown on the balance sheets, so my ability to lend to them will increase.These companies will have health ier balance sheets. These benefits will come in the next 12 months.

For the government and the masses?

Then there will be benefits on tax collection. It has been reckoned that whatever Rs 11-12 lakh crore that has been collected, a lot of that is undisclosed income, which has to be taxed and that should go into the revenue kitty and go back to the people whether through tax relief or justified subsidies. Those benefits should accrue in the next fiscal year. We should not have to wait five years for that. The widening of the tax net is the massive benefit. Paying taxes is going to be a way of life for a larger population, therefore, revenue collection should improve. Can it go back in the form of lower taxes like the minimum slab that can be taken up? That’s the immediate benefit and is a way of recirculating the money back and creating consumption demand. Those are the things we should watch in the budget closely.

There is also an argument that the entire money is coming back into the system, so where is the black money?

The first for all those people who had undisclosed income was to put it back into the system. The second point is to pay tax on it, which is yet to be experienced. People are saying that maybe Rs 3 lakh or Rs 4 lakh crore was to be buried and that would have gone as transfer of wealth. My point is that if that doesn’t happen, you will recover it in taxation. To that amount more has been disclosed, so now you recover and tax it, that’s the whole issue. You have taken the money into the formal system and you can now calculate taxation, impose penalties and raise revenues. Secondly, you won’t allow it to be recirculated back at the same speed. People are saying it’s gone away in Rs 1,000 notes, but it will come back as Rs 2,000 notes, but at what speed? You can only draw Rs 24,000 per week even if you put in Rs 50 crore. So the speed at which you draw cash has to be restricted.In Europe, for example, you cannot withdraw more than 500 euros. Our

ATMs allow Rs 2 lakh. Why should you allow that sort of money?

The need for reducing cash automatically eliminates the ability to give cash as graft. The flow of cash back into the system must be controlled and reduced.

There were assumptions that the RBI’s saving from this demonetisation will give the government a bonanza…

The government never said that.These were all speculations. I have not heard anyone senior in the government say this was our expectation, that we should not receive the whole thing back. The question is that if that does not happen, so much more has been disclosed and now become taxable. The tax kitty has increased and, therefore, the ability to raise revenues from taxation also goes up by the same amount.

What does it mean for the banking system as a whole?

With the creation of payment banks and digitisation, this was going to happen, only that it has now been fast-forwarded because cash is not needed to the same extent. Banking system as a whole, therefore, has liquidity, but the question is whether the banking system has the ability to deploy these funds. As it is, credit growth was sluggish, so how quickly will banks deploy this money and how much demand for credit will there be, that’s the biggest issue. Under the MCLR system, there is automatic transmission. Banks can only make money by deploying liquidity. The cost of deposits and cost of credit both are plummeting.The MCLR system is working, which means the cost of borrowing goes down, which should translate into demand for credit after this blip we see. So you should see an increase in the credit offtake and the first point of call will be retail because, they are more agile.

How long will this situation continue? Is there a structural shift for the Indian economy?

I think it is here to stay. We are going to see very liquid circumstances.Low cost, benign interest rate scenario for quite a long time. You will have a longer period of benign low-ranged interest rate scenario, which is good for the system. All this is linked. You manage fiscal deficit because your tax revenues go up.Therefore, inflation remains under control, therefore, interest rates remain benign. So you have reversed that vicious cycle, which got us into trouble three years ago. To give subsidies, you raise deficit. Welfare funding in the previous regime caused fiscal deficit, which caused bouts of inflation, which used to come once in five years, then in two years, and became permanent. That cycle has been reversed. You control fiscal deficit by giving subsidies after creating the revenue, not by printing money. Low fiscal deficit, therefore, will bring inflation down, therefore, interest rates down, therefore long period of benign interest rates, and, therefore, demand should surge.